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Quick Summary
Trading with MACD indicator includes the following signals:
MACD lines crossover — a trend is changing
MACD historam staying above zero line — market is bullish, below — bearish.
MACD histogram flipping over zero line — confirmation of a strength of a current trend.
MACD histogram diverges from price on the chart — signal of an upcoming reversal.
Details
MACD is the simplest and very reliable indicators used by many Forex traders.
MACD (Moving Average Convergence/Divergence) has in its base Moving Averages.
It calculates and displays the difference between the two moving averages at any time. As the market moves, moving averages move with it, widening (diverging) when the market is trending and moving closer (converging) when the market is slowing down and possibility of a trend change arise.
Basics behind MACD indicator
Standard indicator settings for MACD (12, 26, 9) are used in many trading systems, and these are the setting that MACD developer Gerald Appel has found to be the most suitable for both faster and slower moving markets. In order to get a more responsive and faster performance from MACD one can can experiment with lowering MACD settings to, for example, MACD (6, 12, 5), MACD (7, 10, 5), MACD (5, 13, 8) etc.
These custom MACD settings will make indicator signal faster, however, the rate of false signals is going to increase.
MACD indicator is based on Moving Averages in their simplest form. MACD measures the difference between faster and slower moving average: 12 EMA and 26 EMA (standard).
MACD line is created when longer Moving Average is subtracted from shorter Moving Average. As a result a momentum oscillator is created that oscillates above and below zero and has no lower or upper limits. MACD also has a Trigger line. Combined in a simple lines crossover strategy, MACD line and trigger line crossover outperforms EMAs crossover.
Besides being early on crossovers MACD also is able to display where the chart EMAs have crossed: when MACD (12, 26, 9) flips over its zero line, if indicates that 12 EMA and 26 EMA on the chart have crossed.
How does MACD indicator work
If to take 26 EMA and imagine that it is a flat line, then the distance between this line and 12 EMA would represent the distance from MACD line to indicator's zero line.
The further MACD line goes from zero line, the wider is the gap between 12EMA and 26 EMA on the chart. The closer MACD moves to zero line, the closer are 12 and 26 EMA.
MACD histogram measures the distance between MACD line and MACD trigger line.
MACD indicator Formula
MACD = EMA(Close)period1 - EMA(Close)period2
Signal Line = EMA(MACD)period3
where
period1 = standard settings are 12 bars
period2 = standard 26 bars
perid3 = standard 9 bars
The following are the steps to calculate MACD
1. Calculate the 12-days EMA of closing price
2. Calculate the 26-days EMA of closing price
3. MACD = 12-days EMA - 26-days EMA
4. Signal Line = 9-days EMA of MACD
Formula for EMA
EMA = (SC X (CP - PE)) + PE
SC = Smoothing Constant (Number of days)
CP = Current Price
PE = Previous EMA
Trading MACD Divergence
MACD indicator is famous for its MACD Divergence trading method.
Divergence is found by comparing price shifts on the chart and MACD values.
MACD Divergence phenomenon occur as a result of shifting forces on the Forex market.
For example, while Sellers may seem to be dominating the market at the moment and price continues to trend down, there already might be signals for an overall weakening of Sellers power. This key warning moments can be observed with MACD indicator. What Forex traders would see is that despite price making new Lower Lows, MACD doesn't confirm that and instead registers a Higher Low, signaling that Sellers are running out of steam and a trend change is on its way.
Opposite will be true for Buyers.
How to trade MACD Divergence
When MACD line (on our screenshot it is a blue line) crosses Signal line (red dotted line) - we have a point (top or bottom) to evaluate. With two most recent MACD line tops or bottoms find corresponding tops/bottoms on the price chart. Connect MACD tops/bottoms and chart tops/bottoms.
Evaluate the lines received, as shown on the larger screenshot (click on the small picture to enlarge).
With MACD divergence spotted Enter the market when MACD line crosses over its zero point.
Another entry strategy is to find 2 most recent swings high or low on the chart and draw a trend line trough them; and then set an Entry order on the breakout of that trend line.
MACD divergence trading method used not only to predict trend turning points, but also for trend confirmation. A current trend has high potentials to continue unchanged in case no divergence between MACD and price was established after most recent tops/bottoms evaluation.
MACD divergence explained
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I noticed you look at MACD line to identify divergence.
I learned earlier that traders also look at MACD histogram to trade divergence.
Could you please explain the difference. thank you.
Yes, that is correct. We use MACD line. As you have noticed our MACD indicator has 3 elements: MACD line, a Signal line and a histogram.
Many traders nowadays use MetaTrader 4 platform. There MACD has only 2 elements: a MACD itself which is displayed as a histogram and a Signal line. That is why some traders are saying that they are looking at MACD histogram to trade divergence...
I've found some interesting info + a simple system of trading with MACD:
MACD CROSS and MACD DIVERGENCE. Could be of use to some traders looking to learn basic principles of MACD trading.
Diego
why is it that its when one enters a trading position that the trend ends and reverse on you?
Try trading higher time frames.
You cold be making a mistake common among traders: they set distant profit targets while trading small time frames. With small time frames your targets should be small.
Also when you trade with indicators, you should realise that majority of them lag, give delayed signals. This means that a trend is underway when, in this case, MACD releases a signal.
Trends on small time frames end quickly. When your entry is delayed, because you were using indicators, you've got not much time to profit. That's why targets should be small.
If your goal is to collect larger profits while relying on indicator signals, then you should be looking at daily charts or higher. With MACD on daily charts you'll be able to catch large trends that will last for days or even months, so there will be plenty of time for a trade to develop and profits to be collected before a trend reverses.
pls am still novice on how to apply the MACD. i mean how to plot it. pls help me out
It'll depend on the trading platform you use.
There is nothing wrong about asking your Forex broker to help you with finding and applying the MACD indicator. In fact, they must be glad to teach you the basics of using their Forex platform.
Try it, but if nothing works, come back and we'll figure it out.
Which direction does the price move after divergence.
After bearish divergence price will go down, after bullish - up.
pls how can i get ur macd indicator software
MACD_custom.mq4
Can the MACD system be used for minute to minute trading?
yes, especially if you zoom in the histogram and trade the momentum - when rising histogram stops rising and begins to fall (or after falling - begins to rise).
Also a flip across zero level can be traded too.
you metioned a "TRICK" in your video above:
"buy in on the stock near the SUPPORT LINE.
If the stock closes below the SUPPORT LINE (in case
of a long trade), exit the trade at the next bar at least, never get caught
in a trade closing below the SUPPORT LINE on a second bar- A iron clad rule.
question: what is the SUPPORT LINE you mention?
These are trend lines, which act as support and resistance levels.
Trend lines should always be present on your trading charts.
Hi, I am using H4 and have been trying to track types of candlesticks comparing with the histogram but finding it rather impossible since the bars move while the candlestick changes (up and down), I thought by seeing the height of the bar on the histogram i can see if to catch even small trends and make small profit from it, is this wrong?
what i'm doing is as soon as a new candlestick is created i place an order so if the histogram bar is shorter than the previous one i then sell (immediately), is this wrong? there MUST be something i'm doing wrong because sometimes that candlestick extends causing the histogram bar to sometimes extend too which means my current "selling" order is actually wrong then?
Do i still have to use this indicator with others or can i use it on its own? I was under impression it's different to the standard MACD that you get with MT4 as the standard indicator one would normally use RSI, Stochastics and bolinger bands with it, please help, thanks
It appears to me you're doing everything right, just a bit too early. The candlestick you're watching has to Close, before you can evaluate its corresponding histogram bar on MACD. That's it.
The custom MT4 MACD uses the same formula as any other MACD, the difference is in the way the data is being displayed. By running 2 MACDs together (regular and custom) you'll be able to figure out which line corresponds to which in no time.
what are the best settings for scalpers (short TFs) ?
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